The International Logistics Company (ILC) is considering buying an inventory con

Question

The International Logistics Company (ILC) is considering buying an inventory control software program that will cost $140,000, delivered and installed (including personnel training). The program will allow the company to reduce its inventory by $100,000. The cost of the software will be expensed the year it is bought. ILC is subject to a 40 percent corporate tax rate, and its weighted average cost of capital is 10 percent. Should ILC buy the software program? Answer the question using economic value added and market value added analysis.

Explanation / Answer

ECONOMIC VALUE ADDED Cost of the software 140000 Savings in inventory 100000 Economic Value added=Savings in Inventory 100000 MARKET VALUE ADDED Savings in inventory 100000 Cost of Capital @10%( or interest on 140000) 14000 Net Income through savings 86000 Tax on the savings@40% 34400 Net Income 51600

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